Time To Enact Real Enterprise Zones

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There is a genuine and urgent desire in Washington to trigger an
economic rebirth of America's inner cities. But two rival proposals
to help achieve that goal are the products of two profoundly
different visions of how to generate economic development within
inner-city America. One vision, which is the basis for an
initiative being prepared by the Clinton Administration, assumes
that progress can be achieved only if government leads the process
of development and primes the economic pump. It calls, in effect,
for an urban industrial policy managed from Washington. The other
vision, which forms the core of bipartisan legislation intended as
an amendment to the budget reconciliation bill, recognizes that the
wise approach is not to try to pick winners and losers, but instead
to provide the best possible climate of incentives and simplified
regulation to foster local enterprises.

The White House view is that depressed neighborhoods can best be
helped by steering more government programs into them. The Clinton
Administration is readying a plan to do this by giving preferential
treatment in awarding government contracts to firms operating in
troubled neighborhoods. This initiative flows from the
Administration's "Enterprise Zone" program, enacted in the last
Congress, which centered on channeling government programs into
targeted areas. The name given to that government-led program was
particularly ironic since the original enterprise zone idea,
developed in the 1980s, explicitly rejected the notion that
government could trigger an economic recovery in the inner cities
and called instead for a sharp reduction in regulation and taxes to
spur business formation. That earlier version was not enacted.

A very different view of urban economic development is enshrined
in bipartisan legislation introduced in the Senate recently. The
sponsors intend it as an amendment to the upcoming reconciliation
bill.

The Enhanced Enterprise Zone Act (S. 1252) is sponsored by
Senators Spencer Abraham (R-MI) and Joseph Lieberman (D-CT).
Cosponsors include Senators Rick Santorum (R-PA), Carol
Moseley-Braun (D-IL), John Breaux (D-LA), and Michael DeWine
(R-OH.) The legislation would refocus and strengthen the
Administration's enterprise zone program, based on a view of how to
stimulate economic development in depressed neighborhoods that is
very different from that held by the White House. Rather than have
the government try to pick firms for preference in federal
contracts, the Abraham-Lieberman bill seeks to make existing
enterprise zones much more attractive to private investors. It
would do this by eliminating the capital gains tax on investments
in stock, business property, or a partnership in the zones, as well
as by providing other tax incentives for direct investments and
business redevelopment within the zones. The government would not
limit these incentives to selected private investors or firms.

This approach understands that private investors are more likely
than government officials to identify the entrepreneurs that can be
the engines of economic development in depressed neighborhoods. It
also recognizes that one of the main obstacles to business creation
in these areas, particularly for small new firms, is the difficulty
of attracting start-up and working capital. For small new
enterprises, capital typically is obtained from personal savings or
private investors, not from the government--or even banks. That is
why the capital gains tax exemption and other investor incentives
in the Abraham-Lieberman bill are so important. As Senator
Lieberman put it in a 1993 floor statement criticizing the lack of
such incentives in the Clinton enterprise zone legislation,
"Capital incentives are important because they are the one way...
in which the government, with a small expenditure, by reducing
taxes, can draw in a large amount of private capital."

Stimulating a flow of private investor capital also recognizes
that the firms most likely to succeed in a blighted area probably
will not attract the attention of government. Robert Woodson of the
National Center for Neighborhood Enterprise for several years has
been drawing public attention to the remarkable economic successes
of locally generated inner-city enterprises in the most unlikely
situations. Most of these enterprises would not qualify for a
government contract or grant even if they sought it. But with the
incentives of the Abraham-Lieberman bill, they are exactly the kind
of innovative, upstart firms that would be sought out by
risk-taking small investors.

These firms in the inner city also would be helped by another
feature of the bill intended to remove some of the obstacles that
add to the cost and frustrations of starting an enterprise. Within
the enhanced enterprise zones, local governments could request
waivers from federal regulations (other than civil rights, public
safety, and similar rules) that hinder economic development. This
is important because federal rules often unintentionally stymie
economic and social improvement in depressed areas. For instance,
restrictions on business activity in public housing projects in the
past have blocked the creation of tenant businesses to provide
child care, transportation, or other services that would make it
easier for residents to become employed. Realizing the barriers
posed by well-intentioned regulations that ignore practicality,
many state and local governments have taken steps to simplify or
pare back their own rules. The Abraham-Lieberman bill would require
the federal government to do likewise in the zones.

The Abraham-Lieberman legislation would take the first steps to
help stabilize depressed areas in two other crucial ways. First, it
would foster home ownership within enterprise zones. Based on
proposals first developed by former Housing Secretary Jack Kemp,
the legislation would provide incentives and grants to encourage
resident management and ownership of public housing and the
ownership of vacant property. Experience has shown that resident
management and home ownership encourage the sense of long-term
commitment among the residents of a neighborhood that is so crucial
to establishing a favorable climate for enterprise.

Second, the bill would give some financial help to low-income
parents wishing to obtain a better education for their children by
choosing an alternative public or private school. Though the
provision is modest, it indicates that the sponsors appreciate that
improving the climate for education, as well as for business and
home ownership, is crucial to achieving the economic turnaround of
inner-city America.

The Abraham-Lieberman legislation brings together a surprising
group of bipartisan co-sponsors. They are united behind an approach
to urban improvement that recognizes the failures of government-led
economic development and the need instead to create a positive
climate for investing in small local enterprises. If Congress is to
play its proper role in reviving the inner cities, and the hopes of
those who live there, the first step would be to include the
Abraham-Lieberman legislation in the budget reconciliation
bill.